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Why Is Iran Wrecking Its Economy to Fund War in Syria?

(Cross-posted from the Asia Times)

Estimates of Iran’s military expenditure in Syria vary from US$6 billion a year to US$15-US$20 billion a year. That includes US$4 billion of direct costs as well as subsidies for Hezbollah and other Iranian-controlled irregulars.

Assuming that lower estimates are closer to the truth, the cost of the Syrian war to the Tehran regime is roughly in the same range as the country’s total budget deficit, now running at a US$9.3 billion annual rate. The explanation for Tehran’s lopsided commitment to military spending, I believe, is to be found in Russian and Chinese geopolitical ambitions and fears.

Chaos in Iran’s financial system prevents the Iranian government from carrying a larger budget deficit. The US$9.3 billion deficit reported by the central bank stands at just over 2% of GDP, under normal circumstances a manageable amount. But that number does not take into account the government’s massive unpaid bills. According to a February 27 report by the International Monetary Fund, the government arrears to the country’s banking system amount to 10.2% of GDP. Iran’s delegate to the IMF, Jafar Mojarrad, wrote to the IMF:

Public debt-to-GDP ratio, which increased sharply from 12% to 42% in 2015-16, mainly as a result of recognition of government arrears and their securitization, is estimated to decline to 35% in 2016-17 and to 29% next year. However, it could rise again above 40% of GDP after full recognition of remaining government arrears and their securitization and issuance of securities for bank capitalization.

Iran’s banks have so many bad loans that the government will have to issue additional bonds to recapitalize them, Mojarrad added. Iranian press accounts put toxic assets at 45% of all bank loans.

Iran’s financial system is a black hole, and the government cannot refinance its arrears, recapitalize its bankrupt banks, and finance a substantial budget deficit at the same time. Its infrastructure requirements are not only urgent, but existential. The country’s much-discussed water crisis threatens to empty whole cities and displace millions of Iranians, particularly the farmers who consume more than nine-tenths of the country's shrinking water supply. Despite what the Tehran Times called “a desperate call for action” by Iranian environmental scientists, the government slashed infrastructure spending by two-thirds during the last fiscal year.